Banks make a killing whenever you overdraw your account.
U.S. banks charge an average of $35 per day in overdraft fees, according to new research from Pew Charitable Trusts. And if you think your small, Main Street bank will treat you better than the big banks do, think again. In a new survey of 45 smaller banks, Pew found these institutions allow customers to rack up at least $90 a day in overdraft fees—and many set the limits much higher.
A relatively small group of consumers bear the brunt of these charges, which amount to “costly and unsustainable short-term credit for many financially vulnerable consumers,” said Nick Bourke, director of Pew’s consumer finance project, in a press release.
Younger consumers—from teens up through those in their early 30s—and minorities make up a large percentage of these “heavy overdrafters,” Pew noted in a report released last year. And they’re paying a high price. If you look at overdraft transactions as loans, the ensuring fees would amount to a 17,000% annualized interest rate.
While Bourke decries the practice of charging overdraft fees, it’s easy to see why many financial institutions have embraced them. Overall, banks made over $11 billion from overdraft and insufficient funds fees charged in checking and savings accounts in 2015, according to a report from the Consumer Financial Protection Bureau released earlier this year. (Overdraft fees are those that a customer has agreed to pay the bank to cover any possible shortfalls during a transaction; insufficient funds fees are what the bank charges if you haven’t agreed to overdraft protection and then bounce a check or make a debit card payment without enough money in your account.) About 8% banks’ total net income came from these fees alone.
In the end, instead of turning to a smaller bank, it may make more sense to open a checking account at a credit union or online bank. MONEY’s 2016 Best Banks analysis found that the average overdraft fee at brick-and-mortar banks was around $34, while credit unions charged $28 and online banks charged the least—about $19 on average. (See all of MONEY’s Best Banks coverage.)
In fact, MONEY’s Best Online Bank winner, Bank of Internet USA has no overdraft fee on three of its checking accounts.